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 As of 09/13/2019   Indus: 27,220 +37.07 +0.1%     Trans: 10,814 +100.11 +0.9%     Utils: 847 -6.12 -0.7%     Nasdaq: 8,177 -17.76 -0.2%     S&P 500: 3,007 -2.18 -0.1% YTD  +16.7%    +17.9%    +18.8%    +23.2%    +20.0% Overview: 09/12/2019     26,400 or 27,600 by 10/01/2019   10,200 or 11,100 by 10/01/2019   875 or 830 by 10/01/2019   8,000 or 8,750 by 10/01/2019   2,925 or 3,050 by 10/01/2019
 As of 09/13/2019   Indus: 27,220 +37.07 +0.1%     Trans: 10,814 +100.11 +0.9%     Utils: 847 -6.12 -0.7%     Nasdaq: 8,177 -17.76 -0.2%     S&P 500: 3,007 -2.18 -0.1% YTD  +16.7%    +17.9%    +18.8%    +23.2%    +20.0% Overview: 09/12/2019     26,400 or 27,600 by 10/01/2019   10,200 or 11,100 by 10/01/2019   875 or 830 by 10/01/2019   8,000 or 8,750 by 10/01/2019   2,925 or 3,050 by 10/01/2019

## Thursday 12/30/10. What If Entry and Exit Techniques

I show one picture in two halves. Let's work top down. Imagine that you are trading a stock shown by the curved line in the top of the figure. Would you rather buy at A or B? Why?

Notice that A and B are at the same price....

At A, price is still dropping and it continues to drop after A. Of course, at A, we don't know that price will move lower, but it's a good bet. This is what happens when you try to bottom fish -- buying as price drops, expecting a reversal after price bounces off the bottom.

Now look at point B. Price is moving up. You missed the bottom, of course, but the sky is the limit on the up side. Buying at B is the higher reward, lower risk entry. It's a momentum play: Buy high and sell higher.

Point B is my preferred entry point.

Go back and look at your trades and determine if you are buying at A or B. If it's hard to tell, then switch to the higher time scale and use a LINE chart instead of candlesticks or price bars. That may help show the trend.

Once you're into the stock, consider the sell points of C and D. Price is moving up at C. Why sell if price is rising? At D, price has already peaked and is now tumbling. It's time to exit. Again, both C and D are at the same price. At which point would you rather sell?

At C, price is still rising and any delay will mean more profit. Often, point C represents the type of exits I take. I think price is going to drop so I exit only to find that price continues to rise after a short retrace.

If you wait to D, then every delay means a larger loss or less profit. Price drops faster than it rises. I proved that, so it's not idle speculation. If you wait to sell at D and don't get out quickly, you can get whacked. Nevertheless, point D represents my preferred exit.

Since the buy points A and B and sell points C and D are at the same price, it doesn't matter which you buy and sell at. However, the price trend and delays can mean increased profit or larger losses. Decide which setup is best for you before you trade.

-- Thomas Bulkowski

## Tuesday, 12/28/2010. Tutorial Tuesday: Black Noise

I looked out my back yard window and snapped the picture shown on the right. If you're stuck knee deep in a snow drift, then remember this picture. Maybe it will help. Besides, summer is just around the corner.

\$ \$ \$

Ron Black wrote two articles for Technical Analysis of Stocks & Commodities magazine (September and October 2010, titled, "Getting clear with short-term swings" and "Using Noise"). In one he discusses the "Clear Method" to determine when a short-term trend changes. In the following article, he builds on that to measure noise. If you're interested about the Clear Method, read the tutorial.

By my tests, noise occurs about 47% of the time in nearly 600 stocks, and 40% of the time in 100 exchange traded funds (ETFs). The lower noise in ETFs may be due to frequent gapping, forcing price bars "clear" of any congestion region and appearing to trend more often.

Stocks and ETFs with low noise trend the most, suggesting that they represent the best trading vehicles for swing traders.

Just because a stock or ETF has low noise does not mean it trends upward or downward consistently. Frequently, you see tall swings up and down in straight-line runs.

I also found the following to be true.

• Bull markets tend to be noisier trending up, and bear markets are noisier trending down.
• ETFs trend more than stocks.
• Weekly data is noisier than daily data.

The exciting news is that the What's Hot Wednesday blog posting will show those stocks and ETFs with the lowest noise. They are worth taking a look at. You'll see that post tomorrow.

-- Thomas Bulkowski

## My Prediction

This week, I show the S&P 500 index on the daily scale. The last time I looked through the nearly 600 stocks I follow, I noticed that some were pausing, as if waiting to round over and drop.

If you are a follower of Elliott wave, then the chart may interest you. If are not a Elliott disciple, then the chart may interest you anyway.

I show an ABC correction of the prior up move (in blue) followed by a five leg move higher, in red. Leg 3 is never supposed to be the shortest leg, and it's not in this case.

What this suggests is that an ABC correction is coming after wave 5 ends. That's not always true, since we can have a two-wave extension (or more). That's what I see as a problem with Elliott wave. Every leg can extend with additional waves almost willy-nilly and counting them is a subjective nightmare.

Nevertheless, wave 5 will end sooner or later and then price will drop. It may form wave 6 and then 7 or it could ABC lower. At this point, I'm just enjoying the ride upward.

## A Brief Look Back

The following are economic reports that moved the markets last week. The numbers refer to the close-to-close move in the Dow industrials.

Monday: Down 13.78 points.
Tuesday: Up 55.03 points.
Wednesday: Up 26.33 points.
Thursday: Up 14 points.
Friday: Holiday or other weird event!

### For the Week...

The Dow industrials were up 81.58 points or 0.7%.
The Nasdaq composite was up 22.63 points or 0.9%.
The S&P 500 index was up 12.86 points or 1.0%.

### Year to Date...

Dow Industrials
0.1% down from the high of 11,580.84 on 12/23/2010.
20.4% up from the low of 9,614.32 on 07/02/2010.
Nasdaq
0.4% down from the high of 2,675.26 on 12/22/2010.
29.3% up from the low of 2,061.14 on 07/01/2010.
S&P 500
0.2% down from the high of 1,259.39 on 12/22/2010.
24.3% up from the low of 1,010.91 on 07/01/2010.

## Economic Reports

The following information is derived from yahoo!finance and sometimes Bloomberg.com with times local to the east coast.

 Report Time A-FRating Description Consumer confidence 10:00 T B- Surveys 5,000 households for trends. Crude inventories 10:30 W ? My guess: Measures oil inventory. Initial jobless claims 8:30 Th C+ Counts people filing for state unemployment benefits. Chicago purchasing managers index 9:45 Th B Monitors regional manufacturing activity.

## Options Expiration

No options expire this week.

## Swing and Position Traders: Chart Pattern Indicator

As of 12/23/2010, the CPI had:

9 bearish patterns,
26 bullish patterns,
511 patterns waiting for breakout.
The CPI signal is 74.3%, which is bullish (>= 65%).

The chart pattern indicator is bullish with 2 of 3 full triangles showing (). Additional triangles are a measure of strength with solid triangles meaning a more reliable signal than half triangles.

The following is based on an SFO article in December 2004 by John Seekinger, titled, "Take a two-dimensional approach." He offers these tips.

 Index S2 S1 Pivot R1 R2 Dow Industrials (^DJI): Daily 11,527 11,550 11,566 11,589 11,604 Weekly 11,394 11,484 11,532 11,622 11,670 Monthly 10,710 11,142 11,361 11,793 12,013 S&P 500 (^GSPC): Daily 1,252 1,254 1,256 1,259 1,261 Weekly 1,235 1,246 1,253 1,264 1,270 Monthly 1,144 1,200 1,230 1,286 1,316 Nasdaq (^IXIC): Daily 2,656 2,661 2,666 2,671 2,677 Weekly 2,618 2,642 2,658 2,682 2,699 Monthly 2,416 2,541 2,608 2,733 2,800
• Seekinger doesn't look at the range of S2 to R2 as support and resistance levels. Rather, he considers them oversold (S) and overbought (R) areas.
• S2 to R2 range of values across daily, weekly, and monthly periods: If two values are close together then they lend more significance to the area.
• If the market trends on day 1, the odds rise tremendously that the market will be range bound between daily S1 and daily R1 the next day.
• In a quiet market when traders are waiting for an important earnings announcement or economic report, look for daily R1 and S1 levels to hold and for the market to return to the daily pivot.
• A move outside of daily R1 or S1 usually does not mean a breakout.
• The odds suggest that the entire week's price action will remain between weekly R2 and S2.
• Avoid going long when the market moves above weekly R2 (it's overbought) and avoid going short when price moves below weekly S2 (oversold).
• Consider going short at weekly R1 or long at weekly S1 with a profit objective of the weekly pivot.
• Consider going long at weekly S2 or short at weekly R2 with a profit objective of weekly S1 or R1, respectively.

Here are the formulas:

Pivot point: P = (H + L + C)/3
First resistance level: R1 = (2 * P) - L
First support level: S1 = (2 * P) - H)
Second resistance level: R2 = P + (R1 - S1)
Second support level: S2 = P - (R1 - S1)
H = high price , L=low price, C=closing price

## Consecutive Price Trends

 Index ConsecutiveCloses So Far % Comments Dow industrials (^DJI) 4 weeks up 14.3% Expect a reversal soon. 1 month up 51.6% Expect a random direction. S & P 500 (^GSPC) 4 weeks up 12.9% Expect a reversal soon. 1 month up 53.5% Expect a random direction. Nasdaq composite (^IXIC) 5 weeks up 6.3% Expect a reversal soon. 1 month up 49.0% Expect a random direction.

How long can an index close higher (or lower) each day? The adjacent table shows how often consecutive up or down closes occur in the indexes, based on the most recent trend of closes.

Low percentages suggest the market is overdue to turn (think of it as the likelihood that next week or next month will continue the trend, based on historical performance). Values of 50% mean random, so most percentages will be lower.

The analysis uses data going back 10 years for weekly percentages and 25 years for monthly percentages (or the start of data, whichever is more recent). Any unchanged closing price is interpreted as the end of the string of consecutive up or down closes.

This indicator warns of an index moving into or out of a bear market. It's based on a 12-month simple moving average of monthly closing prices, so it only changes monthly. See 12-Month Moving Average for more details.
Dow Industrials: bullish.
Nasdaq Composite: bullish.
S&P 500 Index: bullish.
Dow Transports: bullish.
Dow Utilities: bullish.

## Earnings, Chart Patterns & Industries

Earnings season is over.

Mutual funds will begin dividend distributions and rebalancing their portfolios for the approaching year end (starts in late November).

 Found Chart Pattern Name 25 Triangle, symmetrical 12 Rising wedge 9 Target price 8 Pipe bottom 6 Head-and-shoulders bottom 5 Triangle, ascending 4 Triple bottom 4 Broadening wedge, descending 4 Head-and-shoulders top 3 Falling wedge

Large numbers of bullish or bearish chart patterns can signal short- to intermediate-term market trends (many bullish chart patterns can mean an uptrend will continue, for example). However, please realize that the short-term price trend could have changed since the pattern was discovered (this is especially true of pipe tops or bottoms, which are weekly patterns).

The 10 types of most frequently appearing chart patterns in the stocks, indexes, and long-only exchange traded funds I follow during the last month are shown in the adjacent table.

The following industries, of 52 that I follow, were the best (1) and worst (52) performing.

 This Week Last Week 1. Coal 1. Coal 2. Internet 2. Internet 3. Oilfield Svcs/Equipment 3. Metals and Mining (Div.) 4. Chemical (Basic) 4. Oilfield Svcs/Equipment 5. Metals and Mining (Div.) 5. Chemical (Basic) 48. Household Products 48. Aerospace/Defense 49. Aerospace/Defense 49. Food Processing 50. Food Processing 50. Medical Supplies 51. Medical Supplies 51. Natural Gas (Diversified) 52. Short ETFs 52. Short ETFs

-- Thomas Bulkowski

## Tuesday, 12/21/2010. Tutorial Tuesday: Position Sizing, A New Look

This weekend, I was playing with position sizing and was scratching my head at how the algorithms I looked at had me investing 35% (or more) in a stock, with just one trade. If I bought it three times, say, averaging up or down, I'd have my entire account in that one stock. I want a diversified portfolio, not a concentrated one.

## Part 1

I know that during the most recent bear market, I cut my position size as the bear market sent prices lower and that allowed me to outperform the market handily: 14.5% loss (me) versus a 38.5% drop in 2008 for the general market. So, I decided to computerize the algorithm. Here's what I use now.

 Market Decline Position Size Description 0% to 19% \$20,000 Do nothing since a bull market is intact. 20% to 29% \$10,000 Bear market begins. Cut position size in half. 30% to 39% \$5,000 Bear market worsens. Cut position size in half. 49% to 100% \$2,500 Bear market worsens. Cut position size in half.

By definition, a bear market begins when an index (I use the S&P 500) drops 20% below a peak. When that occurs, cut the amount allocated to each trade by half. If my position size is \$20,000, I will cut it to \$10,000. You'll want to use your own numbers, of course.

If the market drops another ten-percentage points, then cut the position size in half again -- from \$10,000 to \$5,000 in my case. Continue cutting the position size by half until it reaches \$2,500 (or whatever value you choose).

The advantage of this position-sizing algorithm is obvious. As the bear market begins and worsens, your have the potential to lose less and less of your trading capital. However, this method does keep you in the market, so you can shop for bargains among a variety of stocks. That promotes diversity, which is also a good thing.

To get the position size (shown in the table as \$20,000 then \$10,000), you take the value of the trading account and divide it by the number of positions you want to hold.

For example, say you have a \$300,000 portfolio and want to hold 30 positions, then each position would be \$10,000. Within 20% of a bull market peak, you'd start with 10k per position. When the bear market begins, you'd cut that in half, to 5k and then 2.5k as the bear market worsens.

That gives you the amount to invest in each stock. Now, let's adjust the position for volatility. The more volatile the stock the fewer shares you should own.

## Part 2

I saw one algorithm that compared the current stock's volatility with its historical range. The "current" period used a 10-day high-low calculation but they didn't specify what was meant by "historical." In the example they used, they said "a few years ago."

That bothered me. A company could have had a drug failure, dropping the stock by 70% in one session and then sold the division and you might not know that unless you read the press releases or discovered it some way. I came up with a better idea. Why not compare the stock's volatility to the market's? Here's the formula.

Shares = (PositionSize * (MarketVolatility / StockVolatility))/StockPrice

PositionSize comes from the table, so it's adjusted for the market conditions.
MarketVolatility is the daily change of the market over the last month, averaged, expressed as a percentage.
StockVolatility is the daily change of the stock over the last month, averaged, expressed as a percentage.

For the two volatility calculations, I calculate the high-low difference of the stock or market index (I use the S&P 500 index) each day for 22 trading days, average it, and divide it by the most recent close. This is nearly the same calculation that I use for a volatility stop, so check that link for an example. You can use the ATR, but it's not as effective.

This will give you the number of shares to invest per position. You can have multiple positions per stock.

In short, take the ratio of the two volatilities to further adjust the bucks you spend and divide that by the current share price to get the number of shares.

## Part 3

The third leg of the algorithm is to use a volatility stop. That calculates a stop loss order based on a stock's volatility in a manner similar to the above volatility calculation.

Thus, you have three pieces: Adjusting the position size for the market conditions, adjusting it for the stock's volatility versus the market's, and using a volatility stop to limit losses.

## Example

Let's assume we want to buy Gap (GPS) stock. It closed Friday at 21.19. Our portfolio has a current value of \$100,000 and we want to hold 10 stocks in the portfolio.

The S&P index is down less than 20% from it's high a few days ago. Thus, we'd spend the full \$10,000 for this trade (that's \$100,000 / 10 stocks = \$10,000). To find the number of shares, my program tells me that the market volatility is 0.009 (0.9%) and the stock's volatility is 0.0213 (2.1%). Plugging this into the formula, we get,

Shares = (\$10,000 * (0.009 / 0.0213)) / 21.19 or 200 shares (I round up to the nearest 100 shares). They would be worth 200 * 21.19 or \$4,238.

The volatility stop would be placed at 20.15, or 5% below the current close.

-- Thomas Bulkowski

## My Prediction

I show the Nasdaq composite on the weekly scale.

Notice how price to the left of the vertical green line mirrors across the line on the right side of the chart.

Two valleys bottom near the same price in 2008 and 2009. Two congestion areas located just above the blue smiles reflect across the green line. Finally, the peaks on the left appear on the right at the same price as the blue line shows.

What does this mean?

After a straight-line run, like we've had since the August 2010 bottom, expect price to pause. The left side of the chart shows the pattern, a head-and-shoulders top, circled in red. Will this appear on the right?

It certainly is possible and if it plays out like it did last time, then 2011 will see price moving horizontally. That will be a boon to swing traders and torture for trend traders.

Is that what I think will happen? No. I think price will continue trending, making a measured move up chart pattern.

## A Brief Look Back

The following are economic reports that moved the markets last week. The numbers refer to the close-to-close move in the Dow industrials.

Monday: Up 18.24 points.
Tuesday: Up 47.98 points.
Wednesday: Down 19.07 points.
Thursday: Up 41.78 points.
Friday: Down 7.34 points.

### For the Week...

The Dow industrials were up 81.59 points or 0.7%.
The Nasdaq composite was up 5.43 points or 0.2%.
The S&P 500 index was up 3.51 points or 0.3%.

### Year to Date...

Dow Industrials
0.2% down from the high of 11,519.04 on 12/15/2010.
19.5% up from the low of 9,614.32 on 07/02/2010.
Nasdaq
0.3% down from the high of 2,651.35 on 12/17/2010.
28.2% up from the low of 2,061.14 on 07/01/2010.
S&P 500
0.2% down from the high of 1,246.73 on 12/13/2010.
23.0% up from the low of 1,010.91 on 07/01/2010.

## Economic Reports

The following information is derived from yahoo!finance and sometimes Bloomberg.com with times local to the east coast.

 Report Time A-FRating Description Gross domestic product 8:30 W B Measures economic activity; GDP deflator measures inflation. Existing home sales 10:00 W C Counts sales of used homes. Crude inventories 10:30 W ? My guess: Measures oil inventory. Personal income & consumption 8:30 Th C+ Measures sources of income to predict future demand. Personal consumption expenditures 8:30 Th C+ Covers durables, non-durables, and services. Durable goods orders 8:30 Th B Measures orders, shipments of goods with lifespans >3 years. Initial jobless claims 8:30 Th C+ Counts people filing for state unemployment benefits. Consumer confidence 9:55 Th B- Surveys 5,000 households for trends. New home sales 10:00 Th C+ Shows sales of single-family homes. Holiday Friday Markets closed

## Options Expiration

The following is courtesy of yahoo!finance and they stole it from The Options Industry Council.

 Option Date VIX, RVX expire Wednesday

## Swing and Position Traders: Chart Pattern Indicator

As of 12/17/2010, the CPI had:

6 bearish patterns,
41 bullish patterns,
301 patterns waiting for breakout.
The CPI signal is 87.2%, which is bullish (>= 65%).

The chart pattern indicator is bullish with 2 of 3 full triangles showing (). Additional triangles are a measure of strength with solid triangles meaning a more reliable signal than half triangles.

The following is based on an SFO article in December 2004 by John Seekinger, titled, "Take a two-dimensional approach." He offers these tips.

 Index S2 S1 Pivot R1 R2 Dow Industrials (^DJI): Daily 11,430 11,461 11,482 11,513 11,534 Weekly 11,358 11,425 11,472 11,539 11,586 Monthly 10,724 11,108 11,313 11,698 11,903 S&P 500 (^GSPC): Daily 1,237 1,241 1,243 1,247 1,249 Weekly 1,227 1,236 1,241 1,249 1,255 Monthly 1,147 1,196 1,221 1,269 1,295 Nasdaq (^IXIC): Daily 2,630 2,636 2,644 2,651 2,658 Weekly 2,598 2,620 2,636 2,658 2,674 Monthly 2,393 2,518 2,585 2,710 2,776
• Seekinger doesn't look at the range of S2 to R2 as support and resistance levels. Rather, he considers them oversold (S) and overbought (R) areas.
• S2 to R2 range of values across daily, weekly, and monthly periods: If two values are close together then they lend more significance to the area.
• If the market trends on day 1, the odds rise tremendously that the market will be range bound between daily S1 and daily R1 the next day.
• In a quiet market when traders are waiting for an important earnings announcement or economic report, look for daily R1 and S1 levels to hold and for the market to return to the daily pivot.
• A move outside of daily R1 or S1 usually does not mean a breakout.
• The odds suggest that the entire week's price action will remain between weekly R2 and S2.
• Avoid going long when the market moves above weekly R2 (it's overbought) and avoid going short when price moves below weekly S2 (oversold).
• Consider going short at weekly R1 or long at weekly S1 with a profit objective of the weekly pivot.
• Consider going long at weekly S2 or short at weekly R2 with a profit objective of weekly S1 or R1, respectively.

Here are the formulas:

Pivot point: P = (H + L + C)/3
First resistance level: R1 = (2 * P) - L
First support level: S1 = (2 * P) - H)
Second resistance level: R2 = P + (R1 - S1)
Second support level: S2 = P - (R1 - S1)
H = high price , L=low price, C=closing price

## Consecutive Price Trends

 Index ConsecutiveCloses So Far % Comments Dow industrials (^DJI) 3 weeks up 19.9% Expect a reversal soon. 1 month up 51.6% Expect a random direction. S & P 500 (^GSPC) 3 weeks up 17.8% Expect a reversal soon. 1 month up 53.5% Expect a random direction. Nasdaq composite (^IXIC) 4 weeks up 13.3% Expect a reversal soon. 1 month up 49.0% Expect a random direction.

How long can an index close higher (or lower) each day? The adjacent table shows how often consecutive up or down closes occur in the indexes, based on the most recent trend of closes.

Low percentages suggest the market is overdue to turn (think of it as the likelihood that next week or next month will continue the trend, based on historical performance). Values of 50% mean random, so most percentages will be lower.

The analysis uses data going back 10 years for weekly percentages and 25 years for monthly percentages (or the start of data, whichever is more recent). Any unchanged closing price is interpreted as the end of the string of consecutive up or down closes.

This indicator warns of an index moving into or out of a bear market. It's based on a 12-month simple moving average of monthly closing prices, so it only changes monthly. See 12-Month Moving Average for more details.
Dow Industrials: bullish.
Nasdaq Composite: bullish.
S&P 500 Index: bullish.
Dow Transports: bullish.
Dow Utilities: bullish.

## Earnings, Chart Patterns & Industries

Earnings season is over.

Mutual funds will begin dividend distributions and rebalancing their portfolios for the approaching year end (starts in late November).

 Found Chart Pattern Name 28 Triangle, symmetrical 12 Pipe bottom 11 Rising wedge 5 Broadening top 4 Falling wedge 4 Triangle, ascending 3 Rectangle top 3 Broadening bottom 3 Double Top, Adam and Adam 3 Broadening wedge, descending

Large numbers of bullish or bearish chart patterns can signal short- to intermediate-term market trends (many bullish chart patterns can mean an uptrend will continue, for example). However, please realize that the short-term price trend could have changed since the pattern was discovered (this is especially true of pipe tops or bottoms, which are weekly patterns).

The 10 types of most frequently appearing chart patterns in the stocks, indexes, and long-only exchange traded funds I follow during the last month are shown in the adjacent table.

The following industries, of 52 that I follow, were the best (1) and worst (52) performing.

 This Week Last Week 1. Coal 1. Internet 2. Internet 2. Coal 3. Metals and Mining (Div.) 3. Oilfield Svcs/Equipment 4. Oilfield Svcs/Equipment 4. Metals and Mining (Div.) 5. Chemical (Basic) 5. Chemical (Basic) 48. Aerospace/Defense 48. Food Processing 49. Food Processing 49. Medical Supplies 50. Medical Supplies 50. Cement and Aggregates 51. Natural Gas (Diversified) 51. Homebuilding 52. Short ETFs 52. Short ETFs

-- Thomas Bulkowski

## Thursday 12/16/10. One Candlestick Tip

This is one of the discoveries I made and discuss in my book, Encyclopedia of Candlestick Charts. In each candlestick chapter, I sort candle performance into the yearly price range, just to see if a trend develops. Most of the time, candles that showed the highest post breakout move began their life within the lowest third of the yearly price range. Here are the results.

 Highest Third: 5% Middle Third: 11% Lowest Third: 84%

As an example, the bullish belt hold candlestick in a bear market after a downward breakout drops an average of 11.21% for those candlesticks within a third of the yearly low. Belt holds in the middle third drop 9.35% and those with breakouts in the highest third drop 7.76%. The other breakout directions (up/down) and markets (bull/bear) show similar results, but check the candlestick type you are interested in. The decline in this example measures from the breakout to the trend or swing low (often the nearest minor low).

Knowing that candlesticks within a third of the yearly low tend to be more reliable (meaning price trends farther than otherwise, so you are more likely to walk away with a profitable trade) is the kind of information that gives traders like me an edge. And you can buy that edge from Amazon at the link. Just click on the book picture and it will take you there.

\$ \$ \$

My publisher reports that they sold a license to print "Encyclopedia of Candlestick Charts" in simplified Chinese. Yippee!

-- Thomas Bulkowski

## Tip 1: Don’t Invest. Wait for the Best.

Imagine that you are contemplating a trade, but the chart pattern doesn’t look quite right. You have doubts. Is the left shoulder too far below the right for a proper head-and-shoulders top? Are the two bottoms of an Adam & Eve double bottom too far apart in time or price or is it another combination of Adam and Eve? Such doubts are good to have. You are questioning your entry setup. But if you have to ask me for help with a trade then you should look elsewhere for a more promising setup. If you have doubts about a pattern then others may share similar feelings.

Technical analysis can be a self-fulfilling prophesy. For example, you can mathematically show that round numbers are no more likely to act as support or resistance than other numbers, but if traders believe that they do, then the technique works. That’s why double bottoms spaced a few months apart work better than do those spaced a year apart.

In Encyclopedia of Chart Patterns, second edition, for example, Eve & Eve double bottoms with narrowly spaced bottoms show rises of 44% in a bull market, but those spaced wider apart show post breakout rises averaging just 37%. Traders see the narrower double bottom and trade it, overlooking the wider one.

Do your wallet or purse a favor and wait for a setup in which you are confident that other traders will see it the same way that you do.

## Tip 2: Avoid Overconfidence

My worst trades are those in which I know that I am right. I am so confident in my position that when price drops, I average down (buy more at a lower price, dropping the average purchase price). That technique works well for buy-and-hold providing that price recovers, but it is often a disaster for short-term trades. What happens is that price drops enough so that the pain of losing gets so hurtful that you sell just before the stock begins to recover. Not only do you take a huge loss, but feel additional pain as price recovers and you watch it from the sidelines. You kick yourself for not holding on a few days longer. That belief creates a bad habit. The next time this happens, you will hold longer, suffering an even larger loss.

The next time you feel that the trade is a no-brainer, that it can’t lose, recognize that you’re about to lose big. Skip the trade. Sometimes the best trade you can make is none at all.

## Tip 3: The Trend is Your Friend

If price is in a trading range, meaning that it is bouncing up and down but not really moving anywhere, then a chart pattern breakout could signal the start of a new trend. However, the breakout may be fake and price returns to moving sideways.

That happens a lot. Price will breakout of a chart pattern and move 5% to 10% higher and then collapse. Some traders wait for the collapse and once it's over, they jump in and buy the stock, profiting from a more sedate rise. It's a low risk entry and it certainly beats chasing price higher.

-- Thomas Bulkowski

## My Prediction

I show a chart of SPDR Gold Shares (GLD) on the daily scale. According to yahoo!finance, the exchange traded fund (ETF) "seeks to replicate the performance, net of expenses, of the price of gold bullion. The trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets.

Those baskets much be the expensive type. I wonder what they are made of?

The chart shows the ETF peaking at A and B. It's not a double top until price closes below C. For fun, I replicated peak D on the chart to the right of the green line. To be clear, everything to the right of the green line is a guess as to what will happen in the future. The picture of coming attractions certainly looks plausible but only time will tell if it's correct or not. Nevertheless, that's my guess.

## A Brief Look Back

The following are economic reports that moved the markets last week. The numbers refer to the close-to-close move in the Dow industrials.

Monday: Down 19.9 points.
Tuesday: Down 3.03 points.
Wednesday: Up 13.32 points.
Thursday: Down 2.42 points.
Friday: Up 40.26 points.

### For the Week...

The Dow industrials were up 28.23 points or 0.2%.
The Nasdaq composite was up 46.08 points or 1.8%.
The S&P 500 index was up 15.69 points or 1.3%.

### Year to Date...

Dow Industrials
0.4% down from the high of 11,451.53 on 11/05/2010.
18.7% up from the low of 9,614.32 on 07/02/2010.
Nasdaq
0.1% down from the high of 2,639.41 on 12/10/2010.
28.0% up from the low of 2,061.14 on 07/01/2010.
S&P 500
0.0% down from the high of 1,240.40 on 12/10/2010.
22.7% up from the low of 1,010.91 on 07/01/2010.

## Economic Reports

The following information is derived from yahoo!finance and sometimes Bloomberg.com with times local to the east coast.

 Report Time A-FRating Description Producer price index 8:30 T B- Measures wholesale goods cost. An indication of future inflation. Retail sales 8:30 T A- Reports total retail sales (not services). Are people spending? Business inventories 10:00 T C- Reports manufacturing, wholesale, retail inventories. FOMC Rate decision 2:15 T ? The Federal Reserves reports on interest rate changes. Consumer price index 8:30 W B+ Inflation report. Measures cost of goods and services. Industrial production 9:15 W B- Production of utilities, mines, and manufacturers. Capacity utilization 9:15 W B- Gauges economic activity, hints of inflation. Initial jobless claims 8:30 Th C+ Counts people filing for state unemployment benefits. Housing starts 8:30 Th B- Number of homes beginning construction. Building permits 8:30 Th B- Measures building permits for new construction. Leading indicators 10:00 F D- Summary of already known reports.

## Options Expiration

The following is courtesy of the Options Industry Council.

 Option Date A.M. settled index options cease trading. Thursday Expiring equity, P.M. settled index options and treasury/interest rate options classes cease trading. Expiring cash-settled currency options cease trading at 12:00 P.M. EST. Friday Equity, index, cash-settled currency and treasury/interest rate options expire Saturday

Many options expire this week, so traders will be looking to close out their positions ahead of that, and that suggests increased volatility (large daily price swings).

## Swing and Position Traders: Chart Pattern Indicator

As of 12/10/2010, the CPI had:

3 bearish patterns,
70 bullish patterns,
323 patterns waiting for breakout.
The CPI signal is 95.9%, which is bullish (>= 65%).

The chart pattern indicator is bullish with 2 of 3 full triangles showing (). Additional triangles are a measure of strength with solid triangles meaning a more reliable signal than half triangles.

The following is based on an SFO article in December 2004 by John Seekinger, titled, "Take a two-dimensional approach." He offers these tips.

 Index S2 S1 Pivot R1 R2 Dow Industrials (^DJI): Daily 11,338 11,374 11,394 11,430 11,450 Weekly 11,273 11,342 11,396 11,465 11,520 Monthly 10,742 11,076 11,263 11,598 11,785 S&P 500 (^GSPC): Daily 1,230 1,235 1,238 1,243 1,246 Weekly 1,213 1,226 1,233 1,247 1,254 Monthly 1,151 1,195 1,218 1,263 1,285 Nasdaq (^IXIC): Daily 2,607 2,622 2,631 2,646 2,655 Weekly 2,565 2,601 2,620 2,657 2,676 Monthly 2,399 2,518 2,579 2,698 2,759
• Seekinger doesn't look at the range of S2 to R2 as support and resistance levels. Rather, he considers them oversold (S) and overbought (R) areas.
• S2 to R2 range of values across daily, weekly, and monthly periods: If two values are close together then they lend more significance to the area.
• If the market trends on day 1, the odds rise tremendously that the market will be range bound between daily S1 and daily R1 the next day.
• In a quiet market when traders are waiting for an important earnings announcement or economic report, look for daily R1 and S1 levels to hold and for the market to return to the daily pivot.
• A move outside of daily R1 or S1 usually does not mean a breakout.
• The odds suggest that the entire week's price action will remain between weekly R2 and S2.
• Avoid going long when the market moves above weekly R2 (it's overbought) and avoid going short when price moves below weekly S2 (oversold).
• Consider going short at weekly R1 or long at weekly S1 with a profit objective of the weekly pivot.
• Consider going long at weekly S2 or short at weekly R2 with a profit objective of weekly S1 or R1, respectively.

Here are the formulas:

Pivot point: P = (H + L + C)/3
First resistance level: R1 = (2 * P) - L
First support level: S1 = (2 * P) - H)
Second resistance level: R2 = P + (R1 - S1)
Second support level: S2 = P - (R1 - S1)
H = high price , L=low price, C=closing price

## Consecutive Price Trends

 Index ConsecutiveCloses So Far % Comments Dow industrials (^DJI) 2 weeks up 29.4% The trend may continue. 1 month up 51.6% Expect a random direction. S & P 500 (^GSPC) 2 weeks up 27.8% The trend may continue. 1 month up 53.5% Expect a random direction. Nasdaq composite (^IXIC) 3 weeks up 18.2% Expect a reversal soon. 1 month up 49.0% Expect a random direction.

How long can an index close higher (or lower) each day? The adjacent table shows how often consecutive up or down closes occur in the indexes, based on the most recent trend of closes.

Low percentages suggest the market is overdue to turn (think of it as the likelihood that next week or next month will continue the trend, based on historical performance). Values of 50% mean random, so most percentages will be lower.

The analysis uses data going back 10 years for weekly percentages and 25 years for monthly percentages (or the start of data, whichever is more recent). Any unchanged closing price is interpreted as the end of the string of consecutive up or down closes.

This indicator warns of an index moving into or out of a bear market. It's based on a 12-month simple moving average of monthly closing prices, so it only changes monthly. See 12-Month Moving Average for more details.
Dow Industrials: bullish.
Nasdaq Composite: bullish.
S&P 500 Index: bullish.
Dow Transports: bullish.
Dow Utilities: bullish.

## Earnings, Chart Patterns & Industries

Earnings season is over.

Mutual funds will begin dividend distributions and rebalancing their portfolios for the approaching year end (starts in late November).

 Found Chart Pattern Name 28 Triangle, symmetrical 12 Pipe bottom 8 Broadening top 7 Rising wedge 5 Triangle, ascending 5 Horn bottom 5 Target price 5 Head-and-shoulders top 4 Rectangle top 4 Triangle, descending

Large numbers of bullish or bearish chart patterns can signal short- to intermediate-term market trends (many bullish chart patterns can mean an uptrend will continue, for example). However, please realize that the short-term price trend could have changed since the pattern was discovered (this is especially true of pipe tops or bottoms, which are weekly patterns).

The 10 types of most frequently appearing chart patterns in the stocks, indexes, and long-only exchange traded funds I follow during the last month are shown in the adjacent table.

The following industries, of 52 that I follow, were the best (1) and worst (52) performing.

 This Week Last Week 1. Internet 1. Coal 2. Coal 2. Oilfield Svcs/Equipment 3. Oilfield Svcs/Equipment 3. Internet 4. Metals and Mining (Div.) 4. Metals and Mining (Div.) 5. Chemical (Basic) 5. Chemical (Basic) 48. Food Processing 48. Insurance (Life) 49. Medical Supplies 49. Medical Supplies 50. Cement and Aggregates 50. Cement and Aggregates 51. Homebuilding 51. Homebuilding 52. Short ETFs 52. Short ETFs

-- Thomas Bulkowski

## Thursday 12/9/10. Stub Quotes Prohibited!

Ever since I received access to level II quotes, I've wondered why someone would bid \$0.01 or ask \$999,999 for a stock. Now I know the reason.

According to a news item from Active Trader magazine (January 2011 issue), they write, "...new rules [prohibit] market makers from entering so-called stub quotes, which are bids or offers so far off the market [that] they have no chance of being filled, but which satisfy market-maker requirements for maintaining a two-sided market."

The SEC found that stub quotes represented a significant proportion of the trades that executed at "extreme prices" on May 6, the day of the "Flash Crash."

New rules that took effect this past Monday (Dec 6) tighten the band to within 20% to 30% of the national best bid and offer. The 20% trigger occurs near the open and close (before 9:45 or after 3:35) and 30% for other times during market hours. The range can tighten to 8% for stocks participating in the new circuit breaker program.

-- Thomas Bulkowski

## Tuesday 12/7/10. Tutorial Tuesday: Cups and Caps Revisited

I completed my review of the diving board chart pattern. You can read the complete details at the link.

\$ \$ \$

Donna Brantley suggested an example would be worthwhile showing the cup and cap trading setup. That is described below. Thanks to Rick Lawless who spotted the setup in the Dow utilities. I also botched the numbers having to do with moving averages in the performance results section of the setup. The results have been fixed and they show some improvement.

I show a picture of the Dow Utilities on the weekly scale. At point A begins the red box inset which shows the three bar net line for up and downtrends. Points 1, 2, and 3 correspond to the three-bar net line in an uptrend. However, price closes below the three-bar net line, flipping the trend to downward. That happens at the phrase "Trend Down" on the chart.

Following that, points 4, 5, and 6 show a three-bar net line that confirms a trend change from down to up. That occurs at "Trend Up."

A cap pattern appears at the bottom of the down trend, shown in the blue box inset. Thus, we have all of the ingredients of a buy signal except for the 10-period SMA. If you draw in the SMA, you'll find that price is above the SMA, so an entry signal is given on 11/30/2009 at 379.92. I show that as the green line.

For the exit, I only show the cup pattern, but the three-bar net line is the same as the red bar. You can see the three higher lows clustered together in the three days before the sell signal. The sell signal occurs on 11/15/2010 at 398.52 for a gain of \$18.60 per share. That's not much considering a drawdown of 12.6% during the trade and a hold time loss of 8.7%.

-- Thomas Bulkowski

## My Prediction

I shows two charts of the Dow industrials on the daily scale. The one on top is the most recent. Price begins its rise at A after suffering through an ABC type correction. Then we see price moving up in a curving arc to B. The Dow corrects again to C, not dropping very far, mind you, and following that, the index rises again.

Compare that move to the bottom chart. They are the same. The ABC correction is there, leading the pattern. Price bottoms at D, rises in an arc to E and retraces to F before moving higher.

Does the bottom chart show what is going to happen in the Dow this time?

The answer is easy: No one knows.

However, notice that the retrace of the DE move only corrects to F, which is well above the 38% retrace line. That line is a 38% retrace of the DE rise. Notice how the AB rise in the top chart corrects to C. This correction sees price drop further, but still remain above the 38% retrace line (shown in blue). The inability of the index to decline to the 38% retrace line is a sign of strength...I think.

Both charts appear similar except for the candle pattern. I show that in the inset in the top chart. Notice how each of the two most recent candles are shorter than the prior one. If you are a candle lover, you'll be pulling your hair out now, knowing with certainty that the Dow is going to plunge.

Clearly, the Dow is overextended since it's been moving up for three days in a row, and covering a lot of territory. Thus, a correction should be expected. However, just because the candles are getting shorter is no reason to expect the world to end. It might (especially if you use leverage), but for the rest of us, we will survive.

What does all of this mean? Notice how price is reaching the level of B (top chart). That's a natural resistance point (a prior peak) and coupled with a 3-day rise, then I would expect a small retrace before the resumption of the up move.

However, it's also possible that the Dow will form a double top here -- two peaks near the same price with a close below the valley between the two peaks. That means a drop below C. I don't see that happening because the DEF move (bottom chart) shows that life does continue, that price moves up after F to form higher peaks and higher valleys. That's the scenario I see unfolding into the new year.

Of course, I could be making all of this up.

## A Brief Look Back

The following are economic reports that moved the markets last week. The numbers refer to the close-to-close move in the Dow industrials.

Monday: Down 39.51 points.
Tuesday: Down 46.47 points.
Wednesday: Up 249.76 points.
Thursday: Up 106.63 points.
Friday: Up 19.68 points.

### For the Week...

The Dow industrials were up 290.09 points or 2.6%.
The Nasdaq composite was up 56.9 points or 2.2%.
The S&P 500 index was up 35.31 points or 3.0%.

### Year to Date...

Dow Industrials
0.6% down from the high of 11,451.53 on 11/05/2010.
18.4% up from the low of 9,614.32 on 07/02/2010.
Nasdaq
0.1% down from the high of 2,593.68 on 12/03/2010.
25.7% up from the low of 2,061.14 on 07/01/2010.
S&P 500
0.2% down from the high of 1,227.08 on 11/05/2010.
21.1% up from the low of 1,010.91 on 07/01/2010.

## Economic Reports

The following information is derived from yahoo!finance and sometimes Bloomberg.com with times local to the east coast.

 Report Time A-FRating Description Consumer credit 3:00 T D- Measures auto, credit card and other debt. Crude inventories 10:30 W ? My guess: Measures oil inventory. Initial jobless claims 8:30 Th C+ Counts people filing for state unemployment benefits. Wholesale inventories 10:00 Th D- Wholesale sales and inventory statistics. Trade balance 8:30 F C+ Signals balance of exports & imports. International trade 8:30 F C+ Import/export prices, trade balance. US economy vs others. Treasury budget 2:00 F D Tracks budget deficit. Important in April (tax filing).

## Options Expiration

No options expire this week.

## Swing and Position Traders: Chart Pattern Indicator

As of 12/03/2010, the CPI had:

5 bearish patterns,
29 bullish patterns,
174 patterns waiting for breakout.
The CPI signal is 85.3%, which is bullish (>= 65%).

The chart pattern indicator is bullish with 2 of 3 full triangles showing (). Additional triangles are a measure of strength with solid triangles meaning a more reliable signal than half triangles.

The following is based on an SFO article in December 2004 by John Seekinger, titled, "Take a two-dimensional approach." He offers these tips.

 Index S2 S1 Pivot R1 R2 Dow Industrials (^DJI): Daily 11,293 11,338 11,363 11,408 11,433 Weekly 10,774 11,078 11,233 11,538 11,693 Monthly 10,732 11,057 11,254 11,579 11,777 S&P 500 (^GSPC): Daily 1,214 1,219 1,222 1,228 1,231 Weekly 1,156 1,190 1,208 1,242 1,260 Monthly 1,154 1,189 1,208 1,244 1,262 Nasdaq (^IXIC): Daily 2,559 2,575 2,584 2,601 2,610 Weekly 2,453 2,522 2,558 2,627 2,663 Monthly 2,414 2,503 2,548 2,637 2,682
• Seekinger doesn't look at the range of S2 to R2 as support and resistance levels. Rather, he considers them oversold (S) and overbought (R) areas.
• S2 to R2 range of values across daily, weekly, and monthly periods: If two values are close together then they lend more significance to the area.
• If the market trends on day 1, the odds rise tremendously that the market will be range bound between daily S1 and daily R1 the next day.
• In a quiet market when traders are waiting for an important earnings announcement or economic report, look for daily R1 and S1 levels to hold and for the market to return to the daily pivot.
• A move outside of daily R1 or S1 usually does not mean a breakout.
• The odds suggest that the entire week's price action will remain between weekly R2 and S2.
• Avoid going long when the market moves above weekly R2 (it's overbought) and avoid going short when price moves below weekly S2 (oversold).
• Consider going short at weekly R1 or long at weekly S1 with a profit objective of the weekly pivot.
• Consider going long at weekly S2 or short at weekly R2 with a profit objective of weekly S1 or R1, respectively.

Here are the formulas:

Pivot point: P = (H + L + C)/3
First resistance level: R1 = (2 * P) - L
First support level: S1 = (2 * P) - H)
Second resistance level: R2 = P + (R1 - S1)
Second support level: S2 = P - (R1 - S1)
H = high price , L=low price, C=closing price

## Consecutive Price Trends

 Index ConsecutiveCloses So Far % Comments Dow industrials (^DJI) 1 week up 42.1% Expect a random direction. 1 month up 51.6% Expect a random direction. S & P 500 (^GSPC) 1 week up 39.1% The trend may continue. 1 month up 53.5% Expect a random direction. Nasdaq composite (^IXIC) 2 weeks up 25.6% The trend may continue. 1 month up 49.0% Expect a random direction.

How long can an index close higher (or lower) each day? The adjacent table shows how often consecutive up or down closes occur in the indexes, based on the most recent trend of closes.

Low percentages suggest the market is overdue to turn (think of it as the likelihood that next week or next month will continue the trend, based on historical performance). Values of 50% mean random, so most percentages will be lower.

The analysis uses data going back 10 years for weekly percentages and 25 years for monthly percentages (or the start of data, whichever is more recent). Any unchanged closing price is interpreted as the end of the string of consecutive up or down closes.

This indicator warns of an index moving into or out of a bear market. It's based on a 12-month simple moving average of monthly closing prices, so it only changes monthly. See 12-Month Moving Average for more details.
Dow Industrials: bullish.
Nasdaq Composite: bullish.
S&P 500 Index: bullish.
Dow Transports: bullish.
Dow Utilities: bullish.

## Earnings, Chart Patterns & Industries

Earnings season is over.

Mutual funds will begin dividend distributions and rebalancing their portfolios for the approaching year end (starts in late November).

 Found Chart Pattern Name 24 Triangle, symmetrical 23 Pipe top 13 Head-and-shoulders top 10 Target price 9 Broadening top 5 Pipe bottom 5 Triangle, ascending 5 Triangle, descending 5 Double Top, Eve and Eve 4 Double Top, Eve and Adam

Large numbers of bullish or bearish chart patterns can signal short- to intermediate-term market trends (many bullish chart patterns can mean an uptrend will continue, for example). However, please realize that the short-term price trend could have changed since the pattern was discovered (this is especially true of pipe tops or bottoms, which are weekly patterns).

The 10 types of most frequently appearing chart patterns in the stocks, indexes, and long-only exchange traded funds I follow during the last month are shown in the adjacent table.

The following industries, of 52 that I follow, were the best (1) and worst (52) performing.

 This Week Last Week 1. Coal 1. Internet 2. Oilfield Svcs/Equipment 2. Coal 3. Internet 3. Chemical (Diversified) 4. Metals and Mining (Div.) 4. Oilfield Svcs/Equipment 5. Chemical (Basic) 5. Metals and Mining (Div.) 48. Insurance (Life) 48. Medical Supplies 49. Medical Supplies 49. Insurance (Life) 50. Cement and Aggregates 50. Cement and Aggregates 51. Homebuilding 51. Homebuilding 52. Short ETFs 52. Short ETFs

-- Thomas Bulkowski

## Thursday 12/2/10. A New Chart Pattern!

Let me tell you about the diving board chart pattern. That's what I call the pattern pictured in the figure of AMD (AMD) on the weekly chart. I discovered this on Thanksgiving while searching for stocks to buy instead of eating a big Thanksgiving day meal (but I still gained 5 pounds. Go figure...).

I've been working on this for a week now and not making much progress, but here is what I've found out so far.

Identification

• Use the weekly chart.
• 1) Look for price to have a flat bottom, not top (the top can be any shape, but a flat bottom is critical).
• 2) Price should make an extended drop lower, in a straight-line run down. The drop should not be too far nor too short. That's as specific as I can get right now. I've seen short drops as if the stock has busted a rectangle and shot upward. If the straight-line run is too long, it means there's more trouble in the stock and that means any consolidation will be momentary before the decline begins again. You're looking for a reversal not a consolidation. The decline in AMD is not what I would call a perfect example of the straight-line run. It should last several weeks, not just a 1-week spike lower.
• Price bottoms, often in a 1-week reversal that leaves a tail on the chart (lower shadow). This "nubbin" need not be very tall, but it's there a good portion of the time, I think, but more tests will give a better assessment.
• 3) Price recovers in a straight-line run. This is one of the things that caught my attention -- the straight-line recovery.

Other examples of the diving board can be found in these stocks (symbols).

ANF from 5/12/2003 to 12/22/2003.